Category Archives: China-U.S.

China Now Routinely Riled By US Over Taiwan

THE LATEST PACKAGE of US military kit that the Biden administration has approved for sale to Taiwan has drawn predictable condemnation from China.

The $1.1 billion deal includes a radar warning system to track incoming strikes and Harpoon anti-ship and Sidewinder anti-aircraft missiles, Taipei’s need for which was demonstrated by the People’s Liberation Army’s live-fire exercises following the visit to the island last month by US House Speaker Nancy Pelosi.

A further round of live-fire drills followed the mid-month visit to the island by a separate group of US lawmakers.

The Chinese embassy in Washington told the United States to rip up a deal that it said ‘severely jeopardises’ relations and promised ‘necessary countermeasures. 

The US arms sale still has to be approved by the US Congress, but the votes are sure to be there. US legislators have become increasingly pro-Taiwan and anti-Beijing.

The US administration says the deal is part of continuing efforts to modernise Taiwan’s armed forces, as it is presenting most of its Taiwan policy as routine in counterpoint to Beijing’s belligerence.

Similarly, US officials say they will soon start discussions on a US-Taiwan trade agreement to be concluded by next year. That has already drawn warnings from Beijing not to include anything that implies Taiwanese sovereignty.

The missile sales appear to be catch-up, fulfilling orders placed by Taiwan in the past that went unfulfilled as the United States sent weaponry to Ukraine. Nonetheless, there is no masking that ‘a new normal’ now applies to US-China relations.

With Beijing increasing its ‘grey zone’ activity — somewhere between civilian and military operations — the risks of escalation are growing.

Last week, Taiwan shot down a Chinese drone in Taiwanese airspace for the first time. The downed quadcopter (of the sort that anyone can buy on Alibaba; it was not an unmanned military aircraft) was one of several that have been flying over the Taiwan-controlled islands a few kilometres off the mainland coast for the past month.

These have likely been on intelligence-gathering missions. An ulterior motive may have been to have one shot down to allow Beijing to portray itself as the victim of aggression by foreign forces.

The sturm and drang over the arms deal have let another Biden administration decision announced at the end of the week fly under the radar. The United States will keep in place Trump-era tariffs on Chinese imports. 

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US Businesses In China Face Testing Times

THE LATEST ANNUAL SURVEY survey of its members by the US-China Business Council shows less optimism among US companies operating in China about the business outlook for the country than at any time since the Council started asking. 

Barely half of the 117 firms surveyed expressed optimism about the business outlook for the next five years, a record low. One in five said they were pessimistic.

Two points to note: the respondents to the Council’s survey tended to be their members that are large, US multinationals that have operated in China for more than 20 years and thus are committed to the China market for the long-term and have an understanding of its vagaries — ‘in China, for China’ in the argot.

Second, the survey was fielded before the visit of US House Speaker Nancy Pelosi to Taiwan, which prompted a sufficiently belligerent reaction from Beijing that many US-based chief executives started reviewing their China strategies. The timing may explain why zero-Covid pipped US-China tensions as companies’ top concerns. The survey’s key takeaways:

• China’s COVID-19 policies are the top challenge: China’s COVID-19 strategy now poses the top challenge to US companies, displacing US-China relations, which ranked as the top concern for four consecutive years. The looming possibility that companies will again be forced to partially halt operations due to lockdowns and the impacts of local controls on consumer demand have undermined confidence in the business environment.

• Bilateral tensions continue to hurt American companies: Respondents report record-high concern with US-China relations, which continue to deteriorate. Geopolitical pressures are bleeding into the commercial realm, leaving companies—which depend on a stable and predictable trade environment—in increasingly challenging positions. Chinese customers’ real and perceived concerns about ongoing access to US technology due to US-China tensions continue to threaten US companies’ competitiveness in the market, an alarming trend that could be difficult to reverse.

• Little progress on long-standing issues as new barriers emerge: Significant market access barriers remain, even as China assures foreign companies that they will receive equal treatment. Intellectual property (IP) protection has seen limited improvement. Chinese economic planners have expanded industrial policies to bolster Chinese companies, and localization requirements to qualify for state-affiliated procurement are increasing. At the same time, new Chinese data security and privacy rules threaten to disproportionately increase costs for multinational companies.

• Trajectory of commercial relations at another inflection point: The difficult operating and geopolitical environment has impacted company performance, leading to record levels of pessimism and affecting companies’ decisions about their supply chains and future investments. At the same time, companies overwhelmingly remain profitable in China and they continue to recognize China’s importance to their global competitiveness. Whether business sentiment and the pace of future investment rebound or continue to falter will depend on decisions by US and Chinese policymakers in the coming months and years.

Zero-Covid policies, regulatory crackdowns to align business with national goals and tensions with the United States will likely continue for the foreseeable future and have a long-term impact on foreign companies operating in China. 

Perhaps most damagingly for firms’ confidence is that they underline the secondary position to the state to which business is relegated. For a handful of companies, that will lead to exiting the market in whole or part, as companies that source products or raw materials, rather than sell into the Chinese market, are starting to do. 

However, for those unwilling to give up on the markets offered by the world’s second-largest economy, large enough to segregate their global supply chains, and with the means and will to do so, it will probably mean hunkering down for several uncomfortable and testing years.

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China-US Audit Deal Has Room For Many A Slip

BEIJING AND WASHINGTON have reached a preliminary deal to allow US inspectors to review audit documents of Chinese businesses that trade on US exchanges, a first step toward avoiding the delisting of about 200 Chinese firms from New York exchanges.

This is the latest attempt to resolve a more-than-a-decade-long standoff over mutually incompatible auditing regulations. As the two headlines from the official announcements (above) indicate, it is progress towards a resolution, not the resolution itself.

So that regulators can ‘audit the auditors’ of companies listed on US exchanges, US securities rules require Chinese firms listed in the United States to allow access to documents that Chinese restrictions prevent them from disclosing.

China and Hong Kong are the sole foreign jurisdictions that have not allowed inspections by the Public Company Accounting Oversight Board (PCAOB), the US agency that audits the auditors. All companies listed in the United States must submit to PCAOB inspections under the Sarbanes-Oxley Act of 2002. Beijing cited national security and confidentiality concerns as its grounds for refusing.

Since the US Congress passed the Holding Foreign Companies Accountable (HFCA) Act in 2020, putting a three-year time limit on uncompliant companies coming into compliance, some 200 Chinese firms with a market value of more than USD1tn have been potentially at risk of mandatory delisting if they do not do so.

Under the new agreement, the PCAOB will start inspections in Hong Kong in mid-September. Its inspectors are not travelling to the mainland for health safety reasons, but the agreement stipulates that all the documents they request will be made available to them in Hong Kong.

Towards the end of the year, the PCAOB will determine if they have had the access they require to affirm whether Chinese firms listed in the United States are in compliance with US rules. If not, the US Securities and Exchange Commission (SEC) will determine if the delistings process will go ahead under the HFCA.

The deadline is tight. PCAOB inspections can take months, and the agency will need an army of inspectors to conduct a sufficient sample of audits in parallel.

This is the most detailed and prescriptive agreement on this issue that the two sides have reached, but it is not the first. China’s record of making commitments in principle but then stalling on honouring them in practice advises caution. The success of this deal will be determined by its implementation. There is many a slip between cup and lip, as the old saw has it.

The public announcements of the agreement on both sides underscore the need for caution, with the China Securities Regulatory Commission calling it a ‘cooperation framework’ and the PCAOB, ‘a first step’.

The recently announced intent of several prominent Chinese firms to delist voluntarily from the New York exchanges also suggests that Beijing may be comfortable with a managed withdrawal from US capital markets in favour of primary listings in Hong Kong.

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US-Taiwan Trade Talks Will Further Strain China-US Relations

Screenshot of home page of Taipei Office of Trade Negotiations' web site announcing launch of Washington-Taipei trade talks.

TAIPEI AND WASHINGTON have agreed to start the formal trade talks anticipated by the US-Taiwan Initiative on 21st Century Trade announced in June.

Unsurprisingly, given the fractious state of China-US relations over the island in the wake of the Pelosi visit, Beijing is opposed to the talks, seeing them as part of an effort by the United States to deepen its ties with Taiwan and further distance itself from the ‘One China’ policy. The Ministry of Foreign Affairs warned Washington not to conclude any arrangements that could imply Taiwanese sovereignty.

The discussions will start in early autumn and include agricultural trade and expanded access for small and medium-sized Taiwanese enterprises to US markets, according to a statement from Taipei’s Office of Trade Negotiations. The Office of the US Trade Representative says the talks will also cover trade facilitation, digital trade and anti-corruption standards, all touchpoints of US President Joe Biden’s approach to trade.

A Washington-Taipei trade agreement will partially plug one of the most prominent gaps in the Indo-Pacific Economic Framework that the Biden administration announced in May as part of its strategy to counter China’s growing regional influence. Pressure from the US Congress, which has become increasingly forceful in its support for the island, preceded the June announcement of the separate trade initiative with Taipei.

Both the framework and the initiative are more symbols of US economic engagement in the region than committed pushes for free trade through traditional means such as lowering tariffs and opening market access; expanding free trade is not the tenor of the times in Washington.

Nonetheless, Taipei will be hoping to increase the share of its exports sold to the United States, around 30%, to bring it into better balance with the 40% that go to the mainland and Hong Kong. It has for some years been trying to diversify its markets and has signed free trade agreements with Singapore and New Zealand.

Taipei also hopes that a trade deal with Washington will bolster its application to join the region’s largest operational trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, or TPP11), the successor to the Trans-Pacific Partnership from which former President Donald Trump withdrew the United States in 2017. However, this Bystander sees little immediate prospect of Taipei’s application advancing, especially with Beijing also wanting in.

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NYSE Delistings Will Nudge Forward China-US Decoupling

DID THEY JUMP, or were they pushed? Whichever, the coordinated announcements by five large Chinese state-owned companies that they are to delist voluntarily from the New York Stock Exchange pre-empt US authorities doing it mandatorily.

The five companies are the oil giants PetroChina and China Petroleum and Chemical (Sinopec), Sinopec’s refining subsidiary, Sinopec Shanghai Petrochemical, Aluminum Corp. of China (Chalco) and China Life Insurance, one of the largest state-owned insurers. All have primary listings in Hong Kong. 

All are also in sectors that Beijing would consider strategic and thus is sensitive to information about them being made available to foreign regulators.

The US Securities and Exchange Commission (SEC) and the China Securities Regulatory Commission have been battling for two decades over incompatible auditing regulations. 

The SEC wants US-listed Chinese mainland-based companies to provide the top US audit watchdog, the Public Company Accounting Oversight Board, with the same access to their financial records that is required of all companies to protect investors from accounting frauds and other financial wrongdoing. 

China refuses to let its companies open their books to foreign regulators for national security reasons.

Last year, there were indications of a compromise being struck, but discussions seemingly have stalled. However, it is possible that voluntary delistings that take the most sensitive Chinese companies out of the equation could be paving the way for an agreement. 

The fundamental problem remains that US rules require listed firms to allow access to information that China bars them from disclosing. 

Under the Holding Foreign Companies Accountable Act passed in 2020, the US Congress has imposed a deadline of 2024 for the NYSE to expel companies that do not comply with US audit requirements. 

Upwards of 200 Chinese firms, Alibaba among them, with an aggregate market capitalisation of more than $1 trillion, are potentially at risk of delisting. The departure of each one would mark another step in the slow walk of economic decoupling between the two countries.

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China Announces Military Exercises Close To Taiwan After Pelosi Lands

Map issued by China showing sites of military exercises off Taiwan to be held August 4-7, 2022. Source: Xinhua

US HOUSE SPEAKER Nancy Pelosi has landed in Taiwan, the most senior US politician to visit since 1997.

China has announced military exercises, including live-fire drills in six areas close to the island from Thursday to next Monday (see map above). All appear to be within Taiwan’s Air Defence Identification Zone, and several are in what the United States would consider international waters (the Taiwan Strait) and Taipei its territorial waters.

China has ordered all vessels and aircraft not to enter the six areas where it will conduct its military exercises. The United States will have to respond to this assertion of sovereignty.

The foreign ministry has again condemned the visit, calling it a serious violation of the One-China principle. Economic sanctions have also been imposed on Taiwanese food exports to the mainland.

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Pelosi Keeps The Guessing Game Going

US HOUSE SPEAKER Nancy Pelosi has landed in Singapore on an, at a minimum, four-country visit to the region.

She has still not said whether she will make a fifth stop, in Taiwan, which is stretching strategic ambiguity to near breaking point.

Given Chinese officials’ high-profile warnings of the consequences of any visit, it will be difficult for her not to visit Taipei; otherwise, she will be accused in Washington of buckling to Beijing.

Word reaches this Bystander that US naval assets in the region are moving closer to the island and that the People’s Liberation Army is conducting live-fire exercises near offshore islands opposite Taiwan.

Foreign Ministry spokesman Zhao Lijian’s description of Pelosi as the “number three official of the US government” may suggest a lack of understanding in Beijing about the US constitutional separation of powers. While Pelosi is second in line of succession to the vice-president in assuming presidential powers in the event of the US president’s death, incapacity or removal from office, she is not third in the line of command in the executive branch of government. As head of the legislative branch, she can act independently of the White House.

None of that constitutional nuance will prevent an escalatory response from Beijing should Pelosi set foot on the island or meet President Tsai Ing-wen, even in international waters.

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Pelosi Visit Would Raise Taiwan Tensions

FORMER US SECRETARY of State Mike Pompeo would probably be the most provocative travelling companion imaginable for Nancy Pelosi, Speaker of the US House of Representatives, if she makes her much-discussed trip to Taiwan next month.

On July 24, Pompeo, an arch-China hawk even by the standards of former Trump administration officials, offered to accompany Pelosi on her controversial trip, even though she has not confirmed when, or even if, she would visit Taipei.

If she goes, Pelosi would be the most senior serving US official to visit Taiwan since one of her predecessors as Speaker, Newt Gingrich, a quarter of a century ago.

Ministry of Foreign Affairs spokesman Zhao Lijian yesterday repeated Beijing’s uncompromising opposition to the trip:

The Chinese side has repeatedly made clear to the US side our serious concern over Speaker Pelosi’s potential visit to Taiwan and our firm opposition to the visit. We are fully prepared for any eventuality. If the US side insists on making the visit, the Chinese side will take firm and strong measures to safeguard our sovereignty and territorial integrity. The US must assume full responsibility for any serious consequence arising thereof.

China has reportedly backed up its open threats of retaliation if the visit occurs with stronger than usual warnings through official back channels. The US military is understood to have been told that her plane would not be allowed to land, although it is unclear how China would enforce that.

Whether Pelosi flew in on a military plane or a commercial flight, shooting it down, or even intimidating it would be an act that the United States could not let pass without a strong, probably military response. President Xi Jinping would need to be extremely sure of his ground to let that unfold ahead of the autumn’s Party Congress (or be in a position of desperation, of which there is little to no evidence).

US President Joe Biden said on July 20 that ‘the military thinks it’s not a good idea’ for Pelosi to visit Taiwan. The White House would prefer the trip not to go ahead. It has already been postponed once, after Pelosi contracted Covid-19 in the spring. Yet, given the public discussion about the trip and China’s warnings, Pelosi’s not going would be seen in both Beijing and Washington as a US climb down in the face of Chinese pressure.

Biden said last week that he intends to hold his next conversation with Xi by the end of the month, offering some prospect of a diplomatic de-escalation of the rising tensions over Taiwan. His case will not be helped by efforts in the US Congress to pass a resolution formally abandoning the One China policy, although it has a low chance of passing in this Congress. The next Congress, if Republican-controlled as is possible after November’s elections, would be another matter.

Beijing has been responding to what it sees as Washington salami-slicing the One-China policy through increasing acts of US support for Taipei by ratcheting up its squeeze on Taiwan diplomatically, economically and especially through military intimidation. The risk in tit-for-tat retaliation is always an accidental clash that escalates into a bigger crisis.

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Another Xi-Biden Call In Prospect But China-US Relations Still Listing

China's Foreign Minster Wang Yi seen with US Secretary of State Antony Blinken during the G20 foreign ministers meeting in Bali, Indonesia on July 9.

THE NEXT CALL between President Xi Jinping and his US counterpart, Joe Biden, is edging closer.

Foreign Minister Wang Yi and his US counterpart, Secretary of State Antony Blinken (seen above), held a lengthy (5-hour) meeting on Saturday on the sidelines of the G20 foreign ministers meeting in Bali. Afterwards, Blinken suggested that the two leaders would ‘speak in the weeks ahead’.

Xi and Biden last spoke in November last year.

Reports suggest the Wang-Blinken meeting was what diplomats call candid, with Wang criticising Washington for what it regards as suppressing its rise and Blinken attacking Beijing’s support of Moscow in the war in Ukraine.

Blinken also laid out what Washington considers to be the boundaries of legitimate rivalry between the two powers. That adds some context to the unprecedented joint appearance in London last week by the heads of the US and UK domestic intelligence and security services, the FBI and MI5, calling China the ‘biggest long-term threat to [US and UK] economic and national security’.

However, by most accounts, the tone between Wang and Blinken remained professional and the discussion did not degenerate into a re-run of the infamous slanging match of the March 2021 meeting in Alaska.

A statement on the meeting issued by the Chinese embassy in Washington also warned the United States not to cross its well-known red lines, including Taiwan, Hong Kong and Xinjiang. It added that the bilateral relationship faced mounting challenges and was ‘still not out of the difficulties caused by the previous US administration’.

Blinken gave no hint about how extensively or even if the United States would roll back Trump-era punitive tariffs on Moscow. Biden said on July 8 that he had not yet decided on an issue that divides his administration.

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US Stacks The Chips In High-Stakes High-Tech Game With China

Extreme ultraviolet source, droplet generator and collector mirror in a NXE3400b lithography system. Photo credit: courtesty ASML.Copyright © (ASML) All Rights Reserved

REPORTS FROM THE NETHERLANDS say that Washington is pressing the Dutch government to ban exports of semiconductor fabrication equipment to China.

ASML, one of the key manufacturers in the sector, is headquartered in Veldhoven near Eindhoven in the southern Netherlands. China is the company’s third-largest market after Taiwan and South Korea, worth $2.1 billion in 2021, one-sixth of total annual sales.

Since 2019, a Dutch-US agreement on export licences for dual-use technologies has prevented the company from selling Chinese firms its most advanced lithography systems — the machines that use ultraviolet light to trace the circuitry on computer chips (a detail of which can be seen in the photograph above).

According to the reports, Washington wants to expand the scope of the restrictions as it moves to slow Beijing’s drive for technological self-sufficiency. Last year, the US National Security Commission on Artificial Intelligence recommended that the United States ask its allies to prevent all lithography tool exports to China.

The Catch-22 for Washington is that restrictions on sales of advanced Western technology to China only spur Bejing’s development of its indigenous tech industries to end run US sanctions.

Last month, Bloomberg reported that China’s chip industry was growing faster than any other, with 19 of the world’s 20 fastest-growing chip industry firms being Chinese, compared to just eight a year earlier.

Beijing is pouring billions of dollars of investment into chipmaking by funding national champions, encouraging Chinese firms to ‘buy Chinese’ and through industrial policy programmes like ‘Little Giants’, which backs high-tech start-ups. It is also lobbying as discretely as it can manage against a bill in the US Congress that would provide $52 billion to supercharge US semiconductor manufacturing.

The long-term opportunity for China lies in developing a globally competitive chip industry that would dethrone its US rival and perhaps fatally damage US technological leadership. Former Google chief executive Eric Schmidt and Harvard scholar Graham Allison wrote in the Wall Street Journal last month that:

If Beijing develops durable advantages across the semiconductor supply chain, it would generate breakthroughs in foundational technologies that the US cannot match.

Schmidt and Allison proposed that Washington use carrots (tax incentives and subsidies) and sticks (leaning on their governments) to encourage chipmakers TSMC and Samsung to partner with US chip designers and fabricators to manufacture advanced chips in the United States. That would do nothing but escalate Beijing’s reaction to what it already calls ‘technological terrorism’.

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